Sudden gold plunge has traders looking for answers

CNBC's Sharon Epperson reports some traders are calling the dip in gold today a "flash crash."

Gold futures plunged more than $30 at 10:14 a.m. EST on Monday morning, before regaining nearly all of that drop within the same minute.

The swift move triggered a 10-second pause in trading, and many market participants said a single trading error was probably to blame.

"What has a tendency to happen if someone does a fat finger trade is that it triggers stops that people leave in," said Matthew Hoverman, senior trader at Grafite Capital. "There is a high likelihood that that's what happened today."

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When traders buy gold (or any other futures contract) they often do so with a "stop-loss order," which limits the amount of money that can be lost by automatically selling out of a long position when gold trades down to certain level.

This can compound swift moves, because an initial sale executed poorly or in error sends the market lower, triggering stop losses, which generates more selling, and in turn triggers more stop losses.

This snowball effect explains why the gold market can drop some 2.5 percent in seconds, as it did on Monday morning.

This swift drop led the CME to trigger a 10-second trading pause, known as a "Velocity Logic Event," from 10:14:12 a.m. EST to 10:14:22 a.m. EST. After this pause, gold regained nearly all of those losses, trading back up to $1,235 in the same minute and getting up to $1,242 by 10:27 a.m.

"Logic events are not out of the ordinary for electronic markets," CME Group spokesperson Damon Leavell wrote to CNBC.com. "All trades stand and our technology performed as designed."

"The fact that the market came back the way it did indicated to me that it was probably an error," said Rich Ilczyszyn of iiTrader. "We've seen it here in the last couple of months with increasing frequency. With everybody placing orders on the screen, rather than on the floor, this kind of thing is going to happen."

For instance, when placing an order, a trader could accidentally reverse their quantity and price inputs, Ilczysyzn said. "Mistakes happen."

Gold slides to end the year. The case for a brighter year for bullion, with The Lindsey Group's Peter Boockvar, CNBC's Jackie DeAngelis and the Futures Now Traders, Anthony Grisanti at the Nymex and Brian Stutland in Florida.

But for Eric Hunsader of Nanex, a darker explanation also presents itself.

"I'm still sorting it out," Hunsader told CNBC.com. "It was either an act of supreme stupidity, or there may have been some combination in here of induced arbitrage that made it profitable."

What could have happened, Hunsader posits, is that a firm may have sold enough gold futures to tick the market lower and trigger stop-loss orders. And since the move in gold futures also sends the SPDR Gold Trust ETF (GLD) much lower (in addition to other gold, gold miner and silver ETFs) the trader could buy the ETF for a serious discount.

"That's possible, but it would be a huge risk, unless you're talking about someone playing with huge funds—perhaps a bank." Ilczyszyn commented. "There will always be conspiracy theories. But for me, mistakes happen, and that's just the way it goes."

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